Friday, March 26, 2010

Social Security Facing It's Long Feared Day Of Reckoning

For years we were warned that this day would come, and its rather sudden arrival will present challenging consequences.

The Congressional Budget office has announced that the Social Security system will take in less money than it will pay out this year. That wasn't expected to happen until 2016, but the drop in payroll taxes has created an immediate shortfall. Simply put, there are fewer people working and therefore fewer people paying taxes.

Though the Social Security Administration says the deficit won't affect recipients this year, it will become a problem if the economy doesn't rebound quickly.

The Baby Boomers began retiring this year, and they will continue to do so for roughly the next 20 years, putting great demands on the system. To make matters worse, the high unemployment rate has driven large numbers of people to apply for disability payments, which come from the same system.

One has to wonder how long this situation will last, or how long it can last? And is this the beginning of an irrevocable change?

The latest projections showed that the program would exhaust its funds in 2037, but that now seems optimistic.

The unemployment projections for the next decade are bleak, which will keep revenues low even as demands continue to grow. The Baby Boomers are the proverbial "pig in a snake's belly" of our nation's retirement system.

The system currently has a $2.5 trillion balance from previous decades when more money was flowing in than out. But that will be chipped away in coming years as this trend is reversed. This year, for example, the fund is projected to run a $29 billion deficit.

At some point, outlays are going to irretrievably surpass revenues and at that point the current system will be spent. The solutions are some combination of tax hikes, reduced benefits, and/or an increased retirement age, which is already 66. The age progresses to 67 for those born in 1960 and after.

Any of those proposals will be politically unpopular, but necessary nonetheless. The resulting Congressional battle will be interesting, and the topic will certainly be an election year issue. Tinkering with Social Security has long been viewed as the "third rail" of electoral politics. Older people vote enthusiastically.

The reality is that the alleged $2.5 trillion surplus doesn't even exist; the government spent it. The funds were used to finance deficit spending.

At best, it was a wildly irresponsible misappropriation. At worst, it was a criminal theft from the taxpayers.

From 1937 (when the first payments were made) through 2007, the Social Security program expended $10.6 trillion. But in that same period, the program program received $13.0 trillion in income. But the $2.4 trillion balance was recklessly spent by Congress on other programs.

Meanwhile, the surplus revenues have been continually shrinking since 2007, as the economy contracted and unemployment ballooned.

It is clear that – like it or not – tax increases are coming, as well as cuts to entitlement spending. Means-testing may be introduced so that richer Americans only get back what they put into the Social Security system and nothing more.

According to the Social Security Administration, life expectancy at birth in 1930 was just 58 for men and 62 for women, But men who were 65 in 1935 could expect to live another 12 years, while women faced an average 13 more years. Meanwhile, the retirement age was set at 65.

However, life expectancy has now reached an average of 78 years (76 for men; 81 for women). And life expectancy at age 65 is now 17 years for men and 20 years for women. That means that by retirement age, men and women can now expect to live to 82 and 85, respectively.

The Social Security payroll tax and wage base were much lower when most current retirees were working and contributing to the system. For example, back in 1960, the maximum amount of payroll tax for one earner was just $288. In 1972, it was only $419 a year. And as recently as 1975, it had only risen to $1,650, annually.

The reality is that many older people paid in relatively little compared to their current benefits. As a result, most retirees get back significantly more than they contributed. Obviously, the system was not designed to support this burden.

The Baby Boomers – all 76 million of them, amounting to 25% of our population – began retiring in mass this year and will continue to do so for the next two decades. Unfortunately, however, a significant portion of their contributions have already been spent.

Despite that bitter reality, naturally they still expect the government to keep its promises.

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